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During 2011, when the S&P 500 total return was just 2.11% and many hedge funds were happy with single-digit returns, billionaire investor Carl Icahn's private investment fund posted a 34.5% return.

The fund, which very often takes an activist stance—it's currently in the news for pushing
Amylin Pharmaceuticals
(ticker: AMLN), in which it has a 9% stake, to sell itself—tries to improve operations and boost shareholder value.

Icahn's long record of success makes him stand out from the crowd.
Scott Eells/Bloomberg News

Icahn Enterprises, a limited partnership, controls the $6.5 billion private fund and has $3.1 billion invested in it, on which it is charged no fees. Most of Icahn Enterprises' $25 billion in assets, however, aren't in the private fund, but rather in companies that IEP itself controls and where, historically, Icahn has racked up some of his best returns. Says the 76-year-old investor: "This is where the real hidden value is–when you are lucky enough to get control of a company and clean it up and grow it, that is when you make the big profits."

Examples are plentiful. In 1998, his firm acquired the bankrupt Stratosphere casino operations in Las Vegas; he sold them in 2008 for $1.2 billion, realizing an after-tax gain of $472 million. In 2005, Icahn Enterprises bought National Energy Group, TransTexas Gas, Panaco, and other properties from an affiliated entity for $625 million, cleaned them up, and sold them a year-and-a-half later for $1.6 billion. By having majority control of these companies, IEP had the agility and capital to quickly restructure and build revenue. "It is like shareholder activism without having to go through the timely and costly process of soliciting proxies," Icahn observes.

These companies are in different stages of Icahn's "cleaning up and growing" process. Federal-Mogul, American Railcar, and PSC Metals are clearly in the expansion stage. Last year, Federal-Mogul's revenue increased more than 11%, to $6.9 billion; American Railcar's was up 90%, to $519 million; and PSC Metals' rose 51%, to $1.1 billion. Tropicana is exiting the cleaning-up stage and entering the growing stage. And WestPoint is still being cleaned up; it's moving manufacturing overseas to its principal production facility in Bahrain.

Icahn owns 93% of Icahn Enterprises. While the mere mention of his investing in a public company can boost its stock materially, IEP shares don't rise much on good results, in part because of the small public float and low trading volume—fewer than 14,000 shares daily. Last year, despite increases of 30% and 67%, respectively, in consolidated revenue and Ebitda, Icahn Enterprises had a total return of just 4%.

However, at its recent price around $44, IEP is up 25% this year, more than double the S&P 500's gain. The shares trade at a modest enterprise value/Ebitda multiple of 4.4. (Enterprise value is stock-market value, plus net debt.) The stock is far below the $132 that it peaked at in 2007.

The Bottom Line

Icahn Enterprises shares appear modestly valued, even after its strong performance over the past 18 months. Its small float makes it best-suited for patient, long-term investors.

If the stock gets to a value that Icahn views as close to fair market—say, the low to mid-50s—he could start using it as currency in M&A transactions, a strategy that appears very compelling to him. This would let him quickly expand the company, and also make it more attractive to investors, since he likely would allow the public float to rise, boosting the stock's liquidity.

Icahn Enterprises, which has $3.7 billion in net debt, is an unusual hybrid of activist and private-equity investing. The private fund will continue to do activist investing by taking minority positions in public companies, while Icahn Enterprises can acquire any of these companies and restructure and grow them privately. Observes Icahn: "Knowing that I have the resources through IEP to acquire the fund's portfolio companies gives me more teeth as an activist and ultimately helps the fund's returns."

While you can't count on a 34.5% return every year, Icahn's track record is reassuring. He started investing in 1961 with $100,000 and today is reportedly worth $14 billion—compounding his net worth by 26.6% annually for more than 50 years.

KENNETH SQUIRE, who writes Barron's Activist Spotlight feature, runs the 13D Activist Fund (13dactivistfund.com), which has no position in Icahn Enterprises.